FINA Chap. 4
In the statement of cash flows, retained earnings are handled through the adjustment of ________.
"Net Profits After Taxes" and "Dividends Paid" accounts
Calculate a firm's free cash flow if it has net operating profit after taxes of $60,000, depreciation expense of $10,000, net fixed asset investment requirement of $40,000, a net current asset requirement of $30,000 and a tax rate of 30%.
$0
Under MACRS, an asset which originally cost $10,000 is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 3?
$1,900 (see MACRS rate photos saved on desktop)
A firm has actual sales in November of $1,000 and projected sales in December and January of $3,000 and $4,000, respectively. The firm makes 10 percent of its sales for cash, collects 40 percent of its sales one month following the sale, and collects the balance two months following the sale. The firm's total cash receipts in January is ________.
$2,100
In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of $8,000, depreciation expense of $1,000, and a beginning cash balance of $500. The ending cash balance for August totals ________.
$2,500
The depreciation expense for 2019 is ________. (See Table 4.1)
$200 (problem 61)
Under MACRS, an asset which originally cost $100,000, incurred installation costs of $10,000, and has an estimated salvage value of $25,000, is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 1?
$22,000 (see MACRS rate 2 on desktop)
A firm has projected sales in May, June, and July of $100, $200, and $300, respectively. The firm makes 20 percent of sales for cash and collects the balance one month following the sale. The firm's total cash receipts in July is ________.
$220
Under MACRS, an asset which originally cost $100,000 is being depreciated using a 10-year normal recovery period. The depreciation expense in year 11 is ________.
$4,000
NICO Corporation had net fixed assets of $2,000,000 at the end of 2019 and $1,800,000 at the end of 2018. In addition, the firm had a depreciation expense of $200,000 during 2019 and $180,000 during 2018. Using this information, NICO's net fixed asset investment for 2019 was ________.
$400,000
Common stock dividends paid in 2019 amounted to ________. (See Table 4.1)
$50 (problem 57)
The firm's cash flow from operating activities is ________. (See Table 4.1)
$50 (problem 60)
Calculate net operating profit after taxes (NOPAT) if a firm has sales of $1,000,000, operating profit (EBIT) of $100,000, interest expense of $50,000, and a tax rate of 30%.
$70,000
NICO Corporation had current assets of $2,000,000 at the end of 2019 and $1,800,000 at the end of 2018. In addition, NICO had accounts payable of $1,000,000 in 2019 and $1,500,000 in 2018. Using this information, NICO's net current asset investment for 2019 was ________.
$700,000
Under MACRS, an asset which originally cost $100,000 is being depreciated using a 10-year normal recovery period. The depreciation expense in year 5 is ________.
$9,000
Given the financial data for New Electronic World, Inc. (NEW), compute the following measures of cash flows for the NEW for the year ended December 31, 2019. (a) Operating cash flow (b) Free cash flow (problem 75)
(a) OCF = EBIT - Taxes + Depreciation OCF = $30,000 - $8,000 + $3,000 = $25,000 (b) FCF = OCF - Net fixed asset investment (NFAI) - Net current asset investment (NCAI) NFAI = Change in net fixed assets + Depreciation = ($24,000 -$22,000) + 3,000 = $5,000 NCAI = Change in current assets - change in (Accounts payable + Accruals) = ($99,000 - $87,000) - ($32,000 - $26,000) = $6,000 FCF = $25,000 - $5,000 - $6,000 = $14,000
Darling Paper Container, Inc. purchased several machines at a total cost of $300,000. The installation cost for this equipment was $25,000. The firm plans to depreciate the equipment using the MACRS 5-year normal recovery period. Prepare a depreciation schedule showing the depreciation expense for each year.
(see prob 25)
During 2019, Xeron Corporation had EBIT of $100,000, a change in net fixed assets of $400,000, an increase in net current assets of $100,000, an increase in spontaneous current liabilities of $400,000, a depreciation expense of $50,000, and a tax rate of 30%. Based on this information, NICO's free cash flow is ________.
-$30,000
The ________ is a financial projection of a firm's short-term cash surpluses or shortages.
Cash budget
Allocation of the historic costs of fixed assets against the annual revenue they generate is called ________.
Depreciation
________ is a noncash charge.
Depreciation
A firm's operating cash flow (OCF) is defined as ________.
EBIT times one minus the tax rate plus depreciation
A cash budget gives the financial manager a clear view of the timing of a firm's expected profitability over a given period.
False
A financial planning process begins with short-term, or operating, plans and budgets that in turn guide the formulation of long-term, or strategic, financial plans.
False
A firm's free cash flow (FCF) equals the sum of operating cash flows, financing cash flows, and investing cash flows.
False
A firm's net cash flow is the mathematical difference between the firm's beginning cash and its cash disbursements in each period.
False
An internal sales forecast is based on the relationships that can be observed between a firm's sales and certain key economic indicators such as the gross domestic product, new housing starts, or disposable personal income.
False
As the typical cash budget shows cash flows on a monthly basis, the information provided by the cash budget is adequate for ensuring solvency.
False
Business firms are permitted to systematically charge a portion of the market value of fixed assets as depreciation against annual revenues.
False
By necessity, building pro forma financial statements requires that managers make many assumptions which will not turn out to be true. Therefore, pro forma financial statements are of little use as a financial management tool.
False
Cash budgets and pro forma statements are useful not only for internal financial planning but also are routinely required by the Internal Revenue Service (IRS).
False
Depreciation is considered to be an outflow of cash.
False
Free cash flow (FCF) is the cash flow a firm generates from its normal operations; calculated as EBIT minus taxes plus depreciation.
False
Given a financial manager's preference for faster receipt of cash flows, a longer depreciable life is preferred to a shorter one.
False
If the Tax Cuts and Jobs Act requires a firm to fully deduct the cost of new equipment when it is purchased rather than depreciating that cost over several years, the investment becomes less attractive financially.
False
If the net cash flow is less than the minimum cash balance, financing is required.
False
In the development of pro forma statements, a firm that requires external funds means that its projected level of cash is in excess of its needs and that funds would therefore be available for repaying debt, repurchasing stock, or increasing the dividend to stockholders.
False
In the statement of cash flows, cash flows from operating activities are cash flows directly related to purchase and sale of fixed assets.
False
Net operating profit after taxes (NOPAT) represents a firm's earnings after deducting both interest and taxes.
False
Non-cash charges are expenses that involve an actual outlay of cash during the period but are not deducted on the income statement.
False
Operating cash flow (OCF) is calculated by deducting depreciation from net operating profit after taxes.
False
Operating cash flow (OCF) is equal to a firm's net operating profits after taxes minus all non-cash charges.
False
Profit planning's main focus is on the firm's cash receipts and disbursements throughout the year.
False
The cash budget is a statement of a firm's planned inflows and outflows of cash that is used to estimate its long-term cash requirement.
False
The required total financing figures in the cash budget refer to the monthly changes in borrowing.
False
The sales forecast and various forms of operating and financial data are the key outputs of the short-run (operating) financial planning.
False
The statement of cash flows allows the financial manager and other interested parties to analyze a firm's past and possibly future profitability.
False
________ consider proposed fixed-asset outlays, research and development activities, marketing and product development actions, capital structure, and major sources of financing.
Long-term financial plans
________ are projected financial statements.
Pro forma statements
Cash disbursements include ________.
Rent Payments
________ generally reflect(s) the anticipated financial impact of planned long-term actions.
Strategic financial plans
The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method used for ________ purposes.
Tax
The key input to any cash budget is ________.
The sales forecast
A firm's free cash flow (FCF) represents the amount of cash flow available to investors (stockholders and bondholders) after the firm has met all operating needs and after having paid for net fixed asset investments and net current asset investments.
True
A firm's operating cash flow (OCF) is the cash flow it generates from its normal operations: producing and selling its output of goods or services.
True
As the typical cash budget shows cash flows only on a monthly basis, the information provided by the cash budget is not necessarily adequate for ensuring solvency.
True
Compared to the short-term focus of cash planning, profit planning has a broader emphasis that encapsulates the firm's overall financial position.
True
Depreciation deductions, like any other business expenses, reduce the income that a firm reports on its income statement.
True
Development of pro forma financial statements helps a financial manager to project the amount of external financing required to support a given level of sales as well as overall financial performance of the firm in the coming year.
True
Firms construct pro forma financial statements by studying past relationships between key accounts on the income statement and balance sheet and making judgments about whether those relationships will continue in the near future.
True
For tax purposes, using MACRS recovery periods, assets in the first four property classes are depreciated by the double-declining balance method using the half-year convention and switching to straight line when advantageous.
True
Generally, firms that have cash flows with highly seasonal cash flows or cash flows that are just generally harder to forecast prepare cash budgets more frequently compared to firms with cash flows that are less seasonal and/or more predictable.
True
If the ending cash is greater than the minimum cash balance, excess cash exists.
True
In cash budgeting, other cash receipts are cash receipts expected to result from sources other than sales.
True
In cash budgeting, the impact of depreciation is reflected in a reduction in tax payments.
True
In the statement of cash flows, the cash flows from financing activities result from debt and equity financing transactions; including incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to repurchase stock or pay cash dividends.
True
It would be correct to define operating cash flow (OCF) as net operating profit after taxes plus depreciation.
True
Net operating profit after taxes (NOPAT) represents a firm's earnings before interest and after taxes.
True
One basic weakness of the simplified pro forma approaches lies in the assumption that certain variables, such as cash, accounts receivable, and inventories, can be forced to take on certain "desired" values.
True
One basic weakness of the simplified pro forma approaches lies in the assumption that the firm's past financial condition is an accurate indicator of its future.
True
Operating financial plans are planned short-term financial actions and the anticipated financial impact of those actions.
True
Pro forma financial statements highlight situations in which actual outcomes deviate from projections, which in turn helps managers understand why a firm's results are not in alignment with its forecasts.
True
Since depreciation and other noncash charges represent a scheduled write-off of an earlier cash outflow, they should not be included in the cash budget, though depreciation charges will affect the taxes that a firm pays.
True
Since the percentage-of-sales method assumes that all the form's costs and expenses are variable, it tends to understate profits when sales are increasing and overstate profits when sales are decreasing.
True
Strategic financial plans are planned long-term financial actions and the anticipated financial impact of those actions.
True
The MACRS depreciation method requires use of the half-year convention. Assets are assumed to be acquired in the middle of the year and only one-half of the first year's depreciation is recovered in the first year.
True
The excess cash balance is the amount available for investment by a firm if the desired minimum cash balance is less than the period's ending cash.
True
The net current asset investment (NCAI) is defined as the change in current assets minus the change in sum of the accounts payable and accruals.
True
The net fixed asset investment (NFAI) is defined as the change in net fixed assets plus depreciation.
True
To assess whether any developments have occurred that are contrary to a company's financial policies, the financial manager should pay special attention to both the major categories of cash flow and the individual items of cash inflow and outflow.
True
Under the basic MACRS procedures, the depreciable value of an asset is its full cost, including outlays for installation.
True
Using simulations, a firm can determine the amount of financing needed to protect it adequately against a cash shortage.
True
An internal forecast is based on ________.
a buildup, or consensus, of sales forecasts through a firm's own sales channels, adjusted for additional factors such as production capabilities
Which of the following is a cash inflow?
a decrease in accounts receivable
A corporation raises $500,000 in long-term debt to acquire additional plant capacity. This is considered as ________.
a financing cash flow and investment cash flow, respectively
Once sales are forecasted, ________ must be generated to estimate required raw materials.
a production plan
Given a financial manager's preference for faster receipt of cash flows, ________.
a shorter depreciable life is preferred to a longer one
In general, ________.
a shorter depreciable life is preferred, because it will result in a faster receipt of cash flows
The two main inputs required to construct pro forma financial statements are the ________.
actual financial statements from last year and the sales forecast for the next year
The percentage-of-sales method of preparing pro forma income statements assumes that ________.
all costs are variable
In April, a firm had an ending cash balance of $35,000. In May, the firm had total cash receipts of $40,000 and total cash disbursements of $50,000. The minimum cash balance required by the firm is $25,000. At the end of May, the firm had ________.
an excess cash balance of $0
In October, a firm had an ending cash balance of $35,000. In November, the firm had a net cash flow of $40,000. The minimum cash balance required by the firm is $25,000. At the end of November, the firm had ________.
an excess cash balance of $50,000
Which of the following is a cash outflow?
an increase in accounts receivable
The firm may have increased long-term debts to finance ________. (See Table 4.1)
an increase in current assets (problem 58)
The largest single source of funds for the firm in 2019 is ________.
an increase in long-term debt (problem 56)
A corporation sold a fixed asset for $100,000. This is ________.
an investment cash flow and a source of funds
A firm has prepared the coming year's pro forma balance sheet resulting in a plug figure in a preliminary statement—called the external financing required—of $230,000. The firm should prepare to ________.
arrange for a loan of $230,000
A corporation ________.
can use different depreciation methods for tax and financial reporting purposes
The key outputs of the short-term financial planning process are the ________.
cash budget, pro forma income statement, and pro forma balance sheet
Cash flows directly related to production and sale of a firm's products and services are called ________.
cash flow from operating activities
The three categories of a firm's statement of cash flows are ________.
cash flow from operating activities, cash flow from investment activities, and cash flow from financing activities
The key aspects of a financial planning process are ________.
cash planning and profit planning
The cash flows from operating activities section of the statement of cash flows includes ________.
cost of raw materials
Suppose that under the Tax Cuts and Jobs Act a firm that invests in equipment can immediately deduct the full cost of that equipment or it can depreciate the equipment under the MACRS system. For tax purposes the firm should ________.
deduct the full cost of the asset immediately because doing so reduces taxes and increases cash flow
Which of the following is an example of noncash charges?
depreciation
The cash flows from financing activities section of the statement of cash flows includes ________.
dividends paid
Under the judgmental approach for developing a pro forma balance sheet, the "plug" figure required to bring the statement into balance may be called the ________.
external financing required
Cash flows that result from debt and equity financing transactions, including incurrence and repayment of debt, cash inflows from the sale of stock, and cash outflows to pay cash dividends or repurchase stock are called cash flow from ________.
financing activities
The primary purpose in preparing pro forma financial statements is ________.
for profit planning
When a firm acquires a long-lived asset such as equipment, if the tax law allows it managers would generally prefer to ________.
immediately take a deduction for the full cost of the asset when it is purchased
Which of the following is a source of cash flows?
increase in accounts payable
Which of the following represents a cash flow from operating activities?
increase or decrease in current liabilities
If transportation costs were a huge portion of a firm's expenses and the firm expected gas prices to increase greatly in the next year, then in preparing its pro forma income statement the firm should ________.
increase the percentage of transportation costs from the percentage of last year's sales
A firm has just ended the calendar year making a sale in the amount of $200,000 of merchandise purchased during the year at a total cost of $150,500. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. One possible problem this firm may face is ________.
insolvency
Which of the following line items of the statement of cash flows must be obtained from the income statement?
interest expenses
A firm's final sales forecast is usually a function of ________.
internal and external factors in combination
A firm has prepared the coming year's pro forma balance sheet resulting in a plug figure in a preliminary statement—called the external financing required—of negative $250,000. The firm may prepare to ________.
invest in marketable securities totaling $250,000
A projected excess cash balance for the month may be ________.
invested in marketable securities
Cash flows associated with the purchase and sale of fixed assets and business interests are called cash flow from ________.
investment activities
The ________ method of developing a pro forma balance sheet estimates values of certain balance sheet accounts while external financing is used as a balancing, or plug, figure.
judgemental
The cash flows from operating activities section of the statement of cash flows includes ________.
labor expense
The financial planning process begins with ________ financial plans that in turn guide the formation of ________ plans and budgets.
long-term; short-term
The Tax Cuts and Jobs Act allows firms to immediately deduct the full cost of many assets rather than depreciating that cost over several years using the MACRS rules. Suppose a firm buys a new assets and immediately deducts its full cost. The firm will have ________.
lower profits and higher cash flows than it would have had under the MACRS system
In preparing a cash budget, the ________ seasonal and uncertain a firm's cash flows, the ________ the number of budgeting intervals it should use.
more; greater
For the year ended December 31, 2019, a corporation had cash flow from operating activities of $20,000, cash flow from investment activities of -$15,000, and cash flow from financing activities of -$10,000. The statement of cash flows would show a ________.
net decrease of $5,000 in cash and marketable securities
For the year ended December 31, 2019, a corporation had cash flow from operating activities of -$10,000, cash flow from investment activities of $4,000, and cash flow from financing activities of $9,000. The statement of cash flows would show a ________.
net increase of $3,000 in cash and marketable securities
For the year ended December 31, 2019, a corporation had cash flow from operating activities of $12,000, cash flow from investment activities of - $10,000, and cash flow from financing activities of $4,000. The statement of cash flows would show a ________.
net increase of $6,000 in cash and marketable securities
Short-term financial plans and long-term financial plans generally cover periods ranging from ________ years and ________ years, respectively.
one to two; two to ten
In a period of rising sales, utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to ________.
overstate costs and understate profits
The percent-of-sales method of developing a pro forma income statement forecasts sales and other line items as a ________.
percentage of projected sales
In the next planning period, a firm plans to change its policy of all cash sales and initiate a credit policy requiring payment within 30 days. The statements that will be directly affected immediately are the ________.
pro forma balance sheet and cash budget
Pro forma financial statements are used for ________.
profit planning
Which of the following would be the least likely to utilize a cash budget?
public investors
The firm ________ fixed assets worth ________. (See Table 4.1)
purchased; $200 (problem 59)
Which of the following is a cash flow from financing activities?
repurchasing stock
In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of $8,000, depreciation expense of $1,000,and a beginning cash balance of $500. At the end of August, the firm wants a minimum cash balance of $3,000. At the end of August, the firm ________.
required total financing of $500
The key inputs for preparing pro forma income statements using the percent-of-sales method are the ________.
sales forecast for the coming year and financial statements for the preceding year
Key inputs to short-term financial planning are ________.
sales forecasts, and operating and financial data
If a firm expects short-term cash surpluses, it can plan ________.
short-term investments
A weakness of the percent-of-sales method of preparing a pro forma income statement is ________.
the assumption that the firm's past financial condition is an accurate predictor of its future
The weakness of the judgmental approach to preparing a pro forma balance sheet is ________.
the assumption that the values of certain accounts can be forced to take on desired levels
The depreciable value of an asset, under MACRS, is ________.
the full cost including installation costs
The depreciable value of an asset, under MACRS, is the ________.
the original cost plus installation
An external sales forecast is based on ________.
the relationships between a firm's sales and certain key economic indicators such as GDP and consumer confidence
The key input to the short-term financial planning process is ________.
the sales forecast
Prior to passage of the Tax Cuts and Jobs Act, most large corporations faced a 35% marginal tax rate. Under the new tax law, the marginal tax rate is 21%. In terms of the effect of this tax change on a firm's decision to purchase assets that it will use for several years ________.
the tax law reduces the tax benefits that a firm obtains when it acquires long-lived assets, whether it immediately deducts the full cost of those assets or depreciates the cost over time
The two main weaknesses of pro forma financial statements are ________.
they assume that the firm's past financial condition is an accurate indicator of its future and that managers can force particular accounts to take on particular desired values
The best way to adjust for the presence of fixed costs when preparing a pro forma income statement is ________.
to break the firm's historical costs into fixed and variable components
The primary purpose in preparing a cash budget is ________.
to estimate a firm's short-term cash requirements
For firms with high fixed costs, the percent-of-sales approach for preparing a pro forma income statement tends to ________.
underestimate profits when sales are increasing
The percent-of-sales method to prepare a pro forma income statement assumes a firm has no fixed costs. Therefore, the use of the past cost and expense ratios generally tends to ________ profits when sales are increasing.
understate
Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to ________.
understate profits when sales are increasing
Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to ________.
understate profits when sales are increasing and overstate profits when sales are decreasing
In a period of rising sales utilizing past cost and expense ratios (percent-of-sales method), when preparing pro forma financial statements and planning financing, will tend to ________.
understate retained earnings and overstate the financing needed
Which of the following represents a way of coping with uncertainty in a cash budget?
using scenario analysis, or "what if" approach, to analyze cash flows under a variety of circumstances
